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Small window remains for Total deal

Oil companies are rethinking strategies given the fall in oil prices in recent months

By Elias Hazou

THE government may still have a small window to get oil major Total not to call off a search for oil and gas, after the company let it be known it had identified no drilling targets in its two offshore concessions.

An announcement on Total’s plans is expected next week.

By extending the multinational’s contract beyond 2016 – when its concession on two offshore blocks runs out – the government could give Total some room for manoeuvre, suggests hydrocarbons expert Charles Ellinas.

It’s understood Total is contractually obligated to drill two wells, one in each of their concessions, by 2016 or risk paying a penalty, reportedly as high as 10 per cent of the drilling costs.

But the corporation would be inclined to swallow the pill and pay the fee to halt its Cyprus operations, as the penalty is small change compared to the enormous expense of drilling two wells, running in the hundreds of millions of euro.

Throwing Total a line to drill after 2016 would serve both the company and the government, Charles Ellinas told the Mail.
That’s because even if Total had identified a potential prospect, they might still have been reluctant to sink millions into drilling because of diminishing returns on investment as a result of plunging oil prices.

By giving Total some breathing space, oil prices may rebound by next year or 2017, making prospecting beneficial again.

On Thursday Total itself said they were currently discussing with authorities “a potential programme of additional exploration works in the area.”

This hinted they had not definitively decided to pull the plug on their Cyprus operations.

The statement was perhaps deliberately left vague, in that it did not identify “the area” – did this mean Total’s concessions in blocks 10 and 11, or the entire acreage auctioned during the second licensing round?

On the same day, however, Energy Minister Giorgos Lakkotrypis said the chances of coming to an arrangement with the company were remote.

Briefly there was media speculation that Total might be granted prospecting rights in another offshore block (blocks 7 and 8 were mentioned),

But the Mail understands that this is a non-starter, as Total did not bid for either block 7 or 8 in the second licensing round. The company had put in bids for blocks 9, 10 and 11. Block 9 was eventually awarded to ENI.

Sources close to the company described the reports on blocks 7 and 8 as “inaccurate.”
Moreover, the government cannot simply award a no-bid concession, as EU competition rules dictate it has to go through a licensing round. This is something to which Lakkotrypis alluded to.

And the timing now couldn’t be worse for initiating a new (third) licensing round, as under the current economic and energy climate it would be doomed from the word go, Ellinas told the Mail.

Still, he and Constantinos Hadjistassou, a University of Nicosia academic, believe some way should be found to keep live Total’s operations in Cyprus.

Once the company shuts shop, returning to Cyprus at a later date is no simple matter, they said.

“Even if there are no drilling targets in blocks 10 and 11, it would be preferable, from Cyprus’ perspective, for the company to keep a presence here,” Hadjistassou offered.

“Total’s reference to additional exploration works might mean they are considering carrying out further 3D seismic data, magnetic surveys or simply re-analysing the data at their disposal.

“Oil companies do not just walk out of a project. On the other hand, there would be little point in them staying here if they’re to remain idle. So the government needs to dangle a carrot, whatever that may be,” he said.

The loss of Total, with vast experience and know-how in the LNG business, would be a blow to Cyprus, added Hadjistassou.

Both experts also mentioned that the Total development is no enigma: having found no major gas or oil plays, the company wants to focus on projects with a high probability of production. As it stands, their Cyprus concessions do not qualify as such. It’s a question of priorities in a world of limited resources.

“This is no time to be wasting money on extraneous projects,” Hadjistassou noted.

He drew attention to Total’s announcement this week that it will limiting capital expenditures.
Speaking at the World Economic Forum in Davos, Switzerland, Total CEO Patrick Pouyanne said investments would fall as a result of the oil price decline but expects prices to rebound in due course as part of a normal commodity cycle.

“At $50/b there will be less investment— but then the price will come back,” Pouyanne said.

“We’ll limit the capital investment [in the US]. I won’t drill the wells this year — I’ll drill them next year when the price comes back,” he said, adding that the unconventional sector required high capital investment, but also offered flexibility.

Pouyanne’s comments came a day after he told the UK’s Financial Times that the oil giant plans to reduce its capital spending by 10 per cent this year and freeze new hires in a reaction to sharply lower oil prices.

Meanwhile back home some political quarters were making a lot of noise about Total’s moves being linked to the tense situation in the eastern Mediterranean.

But the energy minister quashed the speculation with a simple argument: he pointed out that the company informed the government it was rethinking its presence on September 12, well before Turkey issued a NAVTEX on October 3 reserving swathes of Cyprus’ exclusive economic zone for seismic surveys.

Also commenting on developments with Total yesterday was Archbishop Chrysostomos who said he was certain the company was not leaving Cyprus “only its programme has differentiated”, he said.

Chrysostomos said he believed not only would Total not leave Cyprus but it would claim other drilling plots, and this was something being negotiated by the government, he said. Commenting on the extensive coverage of the issue, the Archbishop said: “Gossip should not become news.”

He also rubbished the notion that an energy giant like Total could be threatened by Turkey.

“What I can say with certainty is that Total is not going away,” he concluded.

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